Want to know which companies are least likely to survive? Just ask their accountants. They'll tell you.
There are 11 companies that were worth $300 million or more and traded on a major U.S. exchange at the end of their fiscal years, including ocean cargo firm DryShips (DRYS), biotech Mannkind (MNKD) and financial firm Ambac Financial (AMBC), where auditors or internal accountants have expressed their opinion the company may not be able to continue to be a "going concern," according to an analysis of 2013 fiscal year filings through July 4, 2014, by company research firm Audit Analytics.
"A going concern" opinion is one of the biggest red flags an auditor or accountant can wave in the plain view of investors after reviewing the books. A company's accountants must warn investors if they think the company is in strong danger of failing, liquidating or running into serious troubles that threaten its ability to remain in the same corporate form.
Just because a company is deemed a going concern does not mean it will fail — but accountants see the odds being high enough that it's their responsibility to warn investors as part of disclosing the annual audit or annual report.
Fortunately for investors, the number of "going concern" opinions has been dropping since the financial crisis was at its worst in 2008. There have been a total of just 2,205 going concern auditor opinions issued for fiscal 2013 as of July 4 among all companies, which is down 12.9% from fiscal 2013, Audit Analytics says. And last year's count of "going concerns" is down 34% from the high-water mark of this decade, 2008, when there were 3,354 going concern opinions given.
One of the most valuable companies to get pegged with a going concern opinion is DryShips. The Athens, Greece-based company owns a fleet of 38 drybulk carriers used mostly in the energy industry. But the auditor, Ernst & Young, states in the annual filing just how concerned it is. The auditors point out in the filing DryShips reports a working capital deficit of $988 million and that the shipping unit has "not complied with certain covenants of its bank agreements." The company's stock chart shows investors' fleeting faith in the company:
Some companies themselves declare they may not be able to continue being a going concern. Medical developer MannKind issued unaudited financial statements that went into detail on why the company's longevity could be threatened. The company's most promising product is Afrezza, an inhalable insulin the company says was approved by the U.S. Food and Drug Administration on June 27 for the treatment of diabetes.
However, the company frankly states in its financials it has net losses of $2.4 billion and cash and cash equivalents as of June 30 of $41.2 million. The company points out its survival hinges on raising additional money either by selling debt or stock, striking business deals or cutting costs. Until the company tops these hurdles "there will be continued substantial doubt about our ability to continue as a going concern," the company said in its filing. And lately investors have focused on the negatives:
Some of the companies have already run into major issues since the end of their fiscal years. Unilife (UNIS) is developing various drug delivery mechanisms, including injection needles. The company's auditor, KPMG, on Sept. 13, 2013, issued a going concern warning on the company.
"The Company has incurred recurring losses from operations and has limited cash resources, which raise substantial doubt about its ability to continue as a going concern," KPMG wrote in a regulatory filing. Since that opinion, and from the start of this calendar year, the company's fortunes have soured. Shares of the stock are down 41% this year.
Just because a company gets tagged with a "going concern" opinion doesn't mean it's curtains right way. American Airlines was given a going concern opinion in 2002, Audit Analytics says, but then reported its financial results for eight straight years and received clean opinions without the mark of a going concern opinion.
It wasn't until 2011 that American's former parent company AMR, filed for bankruptcy protection. American Airlines received a going concern opinion in 2011 and 2012, but had a clean opinion in 2013, says Don Whalen, analyst at Audit Analytics.
These 11 largest companies tagged with going concern opinions could still use corporate maneuvers to shore up their financials to get a clean audit. But whenever the auditor tells you a company's future is uncertain, it's best to listen.
Below are the 11 companies that traded on a major U.S. exchange with market values of $300 million or more at the end of their most recent fiscal years when the auditors issued a "going concern" opinion:
—By Matt Krantz, USA Today